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FTSE 250 hi-tech firm Oxford Instruments (LSE: OXIG) is down 29% from its 15 July one-year traded high of £26.
It was established in 1959 when it was spun off from Oxford University’s physics department. An early success was its pioneering role in the development of magnetic resonance imaging scans used in medical diagnosis.
Since then it has been at the cutting edge of the design and manufacture of high-tech products for scientific and industrial use.
Most notably perhaps, it is a world leader in nanotechnology. This involves manipulating matter at the atomic and molecular level to create new materials and devices.
Why has the share price dropped?
A key reason behind its recent share price decline was news that it has agreed to sell its NanoScience business.
However, it is important to note that this only comprises part of the firm’s nanotechnology interests. Specifically, the bit that makes special units to supercool quantum computers.
The firm highlights that the sale will boost its margin by 1.9% increase by allowing it to focus on three core structural growth markets. These are materials analysis, semiconductor, and healthcare & life science.
Moreover, up to £50m of the proceeds from the divestment will go to a share buyback. These tend to be supportive of share price gains.
The latest results
The firm’s full fiscal year 2024/25 results saw revenue rise 6.5% year on year to £500.6m. This was the first time revenue had breached the £500m barrier.
Operating profit increased 10.8% to £82.2m, while adjusted profit margin edged up 0.7% to 17.8%.
Revenue is a firm’s total income, while earnings (or ‘profit’) are what remains after expenses have been deducted.
A risk for the firm is a major failure in one of its key products. This might damage its reputation and be costly to fix.
That said, consensus analysts’ forecasts are that its earnings will rise by a whopping 32.4% each year to end-fiscal year 2027/28.
Are the shares undervalued?
The first part of my assessment of the firm’s share price is to compare its key valuations with those of its competitors.
On the price-to-sales ratio, Oxford Instruments’ 2.1 reading is undervalued compared to its peers’ average of 2.7. These comprise Bruker at 1.7, Renishaw at 2.8. Spectris at 2.9, and Thermo Fisher Scientific at 3.5.
However, it looks overvalued at a price-to-earnings ratio of 39.7 compared to its peer group’s 33.3 average.
The second part of my assessment involves running a discounted cash flow (DCF) analysis. This is based on cash flow forecasts for the underlying business and pinpoints where any firm’s share price should be.
Using other analysts’ figures and my own, the DCF for Oxford Instruments shows its shares are 40% undervalued at £18.44.
Therefore, their fair value is £30.73.
My view
I am usually focused on stocks that deliver a high dividend yield, while Oxford Instruments only pays 1.2% at present.
However, its very strong earnings growth potential should power its share price and dividend much higher over time.
I also have no holdings in the fast-growing nanotech sector. Specifically, analysts project it will see a compound annual growth rate of 34.7% by 2032.
Therefore, I will buy the stock very soon.
